Obama to hit the road to avoid driving off the fiscal cliff

(CNN) – As negotiations continue over how to thwart the looming crisis known as the fiscal cliff, President Barack Obama will take his case on the road this week, urging Americans to support his push to let tax rates rise on the wealthiest Americans.

The president will tour a manufacturing facility and give remarks in the southeastern Pennsylvania town of Hatfield on Friday, the White House announced Tuesday. The campaign-style trip comes as another example of the president building pressure on Congress through public support, rather than the behind-closed-doors approach used in last summer's debt talks.

Friday's trip will follow a week of meetings with other constituencies. He'll meet with small-business owners from across the country on Tuesday and host an event at the White House on Wednesday with "middle-class Americans who would be impacted" if Congress fails to reach a deficit-reduction agreement by the year's end.

Also Wednesday, Obama is scheduled to meet with business leaders. He took part in similar meetings with labor groups and business heads two weeks ago, shortly before he held a meeting with congressional leaders in the White House.

The clock is ticking as Congress and the White House work to hash out a plan that would prevent an enormous amount or "fiscal cliff" of tax hikes and spending cuts from taking place next year.

Both sides are stalemated over how to raise revenue as part of a deficit-reduction package. House Republicans call for changes in the tax code - namely the closing of loopholes and limiting of deductions - while Senate Democrats and Obama argue for the expiration of the Bush-era tax cuts for households making more than $250,000.

First off, let's define the fiscal cliff. The fiscal cliff is a series of tax increases and spending cuts set to take effect in 2013. Many of these measures have different sources. Some of the tax increases are coming from the expiration of the Jobs and Growth Tax Reconciliation Act of 2003, otherwise known as "the Bush tax cuts." Other tax cuts were included in the 2009 stimulus act. And then, there are some tax increases are coming from Patient Protection and Affordable Care Act, otherwise known as Obamacare.

The chart below summarizes the tax increases, as taken from the New York Times.

If you take a close glance at these threatened tax hikes, you'll notice something interesting. While the Administration's rhetoric has largely emphasized how the "wealthy should pay more", the vast majority of these tax increases fall on lower and middle income wage earners.

Notice that about 66.4% of the tax increases directly hit lower and middle income earners. This comes mostly from income tax increases, the payroll tax, as well as the elimination of the Alternative Minimum Tax "patch".

Only 9.8% of these taxes would seem to directly hit high income individuals. This would mostly come from the hikes in the capital gains and dividend taxes (a paltry 2% of the overall "cliff"), and income tax increases on higher wage earners.

The other 24.4% is more difficult to make any grand generalizations about, without digging deeper. This would include the "short-term breaks", the estate tax (6% of the cliff), and the Obamacare taxes (about 4%). At least with the estate taxes, we know that this will probably hit mostly higher earners. The New York Times believes the Obamacare taxes also hit high earners, but I'm not sure if I'd totally agree on that. The short-term breaks are likely a mix.

An educated guess then might suggest that about $400 billion of the fiscal cliff taxes will be absorbed by lower and middle income earners, constituting about 75% of the total new taxes. While the other 25%, or $132 billion might be upper income tax increases. In other words, by going "off the fiscal cliff", it would appear that the middle class would be the income group that would suffer the most.

Why is the Cliff So Important?

While many commentators have suggested that investors are making too big of a deal about the fiscal cliff, I'd argue that Investors are dramatically underestimating the potential impact of this. A recent article on the Fiscal Cliff … of 1937 highlights the similarities between our modern fiscal cliff and the tax increases instituted in 1937.

If you look at Federal fiscal data, in 1937, US Federal expenditures were 9.6% of GDP, while US Federal receipts were 6.8% of GDP. In 1938, spending increased slightly to 9.8% of GDP, while receipts increased to 8.4% of GDP. From this, we can see that spending stayed about the same, but the tax burden increased significantly - nearly 25% in one year!

The other takeaway from this data: that new money created by deficit spending equaled 2.8% of GDP in 1937, but it fell to 1.4% of GDP the next year. So while there was still a "fiscal stimulus" that was pumping more money into the economy, it was halved in one year.

The important difference to note between 2012 and 1937 is that numbers are much larger in 2012. The Federal budget deficit is around 7.5% of GDP right now. With the fiscal cliff, it would theoretically half, to around 3% - 4% of GDP. So this is similar to the "Fiscal Cliff of 1937", but we're dealing with larger numbers.

As for the results of the "1937 Fiscal Cliff": the US economy contracted 6.3% in 1938. While it would once again rebound in 1939 (with a likely boost from exports at the dawn of World War II), it's clear that the massive tax increases did have a major short-term impact on the economy.

If you're wondering how that impacted the markets, the answer is "it was pretty brutal!" In early 1937, the Dow Jones Industrial Average peaked at 194.40. By mid-1938, it had bottomed at 98.95. In other words, in about fifteen months' time, the Dow Jones lost nearly half of its value!

This is not exactly something I'd label as "not a big deal." The market did quickly rebound in late '38 and early '39, but it's difficult to figure out how much of that bounce was a reversal from market over-reaction and how much was the result of Adolf Hitler's militarism in Europe increasing demand for US exports.

Lets do it! A 7% contraction is nothing! It may exceed any single year during the last recession and millions of jobs will be lost, but frick yeah, merica lets do it to spite oursleves! WOOOOOOOOOOOO!!!!!!

re: Obama to hit the road to avoid driving off the fiscal cliff(Posted by Scruffy on 11/27/12 at 11:16 am to Tiger n Miami AU83)

As an individual born in the 80s and a member of the generation that is going to get screwed by our fiscal problems, I support going over the "cliff".

A little pain now or massive pain later? Seems an easy decision.

And before anyone says anything about cuts, any individual with even a modicum of intelligence knows that they either won't happen or they'll be the "cuts in increases over 10-20 years". Those cuts are bull shite.

re: Obama to hit the road to avoid driving off the fiscal cliff(Posted by TigerFanatic99 on 11/27/12 at 11:23 am to Scruffy)

quote:As an individual born in the 80s and a member of the generation that is going to get screwed by our fiscal problems, I support going over the "cliff".

A little pain now or massive pain later? Seems an easy decision.

And before anyone says anything about cuts, any individual with even a modicum of intelligence knows that they either won't happen or they'll be the "cuts in increases over 10-20 years". Those cuts are bull shite.

re: Obama to hit the road to avoid driving off the fiscal cliff(Posted by udtiger on 11/27/12 at 12:26 pm to Scruffy)

quote:As an individual born in the late 60s and a member of the generation that is going to get screwed by our fiscal problems (and with two kids), I support going over the "cliff".

A little pain now or massive pain later? Seems an easy decision.

And before anyone says anything about cuts, any individual with even a modicum of intelligence knows that they either won't happen or they'll be the "cuts in increases over 10-20 years". Those cuts are bull shite.

re: Obama to hit the road to avoid driving off the fiscal cliff(Posted by Poodlebrain on 11/27/12 at 6:55 pm to cajunangelle)

It is hypocritical of him, and all members of Congress who voted in December 2010 to accelerate toward the so-called fiscal cliff. Because they couldn't agree on legislation to reduce deficit spending at that time, they agreed to specific future measures in order to retain then current tax rates and spending levels. Now that the time has come for the deferred unpleasant aspects of that agreement to take effect, he is wanting a new deal that eliminates the most significant reduction measures of the agreement.

His new plan should be titled, Slowing Down to Drive Off a Higher Cliff.

re: Obama to hit the road to avoid driving off the fiscal cliff(Posted by cajunangelle on 11/28/12 at 6:02 am to Poodlebrain)

quote:It is hypocritical of him, and all members of Congress who voted in December 2010 to accelerate toward the so-called fiscal cliff. Because they couldn't agree on legislation to reduce deficit spending at that time, they agreed to specific future measures in order to retain then current tax rates and spending levels. Now that the time has come for the deferred unpleasant aspects of that agreement to take effect, he is wanting a new deal that eliminates the most significant reduction measures of the agreement.

His new plan should be titled, Slowing Down to Drive Off a Higher Cliff.

Exactly. He now has a mandate to drive us off the cliff and his state run media are in the car with him.